Public Debt

PUBLIC DEBT
Lecture By
DR.JANGRAIZ KHAN
8th December, 2019

References:
1. Hanif.M.N., (2002). Public Debt Management, MPRA Paper 10212,
University Library of Munich, Germany.
Link: https://ideas.repec.org/p/pra/mprapa/10212.html
2. GoP., (2019), Economic Survey of Pakistan, Ministry of Finance.
Link: http://www.finance.gov.pk/survey_1819.html
3. https://blogs.imf.org/2019/01/02/new-data-on-global-debt/
4. https://www.intechopen.com/books/public-economics-and-finance/theory-of-
public-debt-and-current-reflections
5. Nasution (2000)
https://www.jstor.org/stable/25773625?seq=1
6. https://datatopics.worldbank.org/debt/QuarterlyBulletin-January2019

PUBLIC DEBT
 Public debts: Definition , History, , types
 Recardian Equivalence Theorem
 Why the countries take debt
 Trends in public debt in developing countries
 Causes of growing public debt
 Management of public debt
https://ideas.repec.org/p/pra/mprapa/10212.html
 Public Debt sustainability
 Fiscal multipliers and debt sustainability debate

Instructor: Dr.Jangraiz Khan
Evolution of Public Debt
 The history of public debt is very old
 Ancient and medieval Governments also had function
more or less similar to modern states and needed funds
 Their sources of revenue were also limited and needed
debt but not publicly as today
 According to Sylla (1991), private borrowing started ever
since recorded history
 It continued for many centuries
 Initial loans were in commodities instead of money and
for short term for Wars & personal/other purposes

 In England , 17th Century, after Britain’s Glorious
Revolution (1688)
 Princes , Landlords and the clerics owned states
generated their own income through payments by
farmers etc for military protection.
 Some researchers linkes back the history of Public Debt
back to 4th century
 The origin of modern Public Debt originated from
Britain’s Glorious Revolution (1688) and America’s
Revolution in 1776

 In Italy its origion goes back to 1861 act for Gran Libro/
Great Book of Public Debt
 Italy governments took it for financing wars &
Establishment of kingdom after unification adjusting all
old loans (Ferraris, 1902)
 Eichengreen et al (2018),The public Debt history trace
back to 2000 years
 Italian bankers lent Edward III during the 100 Years’ War
(1337-1443), but it was short term and with high interest
rates

 The long term loans started in 1500 AD
 (Dincecco, 2011, 2015) pointout larger states had fiscal
machinery and had extended fucntions
 (Acemoglu 2005), the war finance objective then shifted
to provision of public goods
 In 18th & 19th century the functions of the government
were limited due to Laisseze-faire philosophy

 The public borrowing policies took turning point after the
WW- I (1914–1918) and the Great Depression (1930s).
J.M Keynes suggested public borrowing as a war
financing to England

 1930s Great Depression led to government intervention

 The role of govt increased in economy
 Balanced budgets deteriorated when Public
expenditures exceeded public revenues
 So govt started more borrowing from public, banks and
foreign resources
 The case became more severe for developing countries
 Weak economic conditions, increase in functions of
state, wars, and emergencies led them borrow more
 This generated the concept of public debt

What is Public Debt
 Public debt (alternatively, national debt or sovereign
debt) is debt owed by the public sector, that is, by
governments and their agencies.
 Public debt— the total of the nation’s debts; debts of
local and state and national governments; an indicator of
how much public spending is financed by borrowing
instead of taxation. — Definition of public debt from www
. webster - dictionary . org
 The amount borrowed by government to finance its
expenditure is called public debt

TYPES OF PUBLIC DEBT
1. Productive and Unproductive Debt
 Productive if used for productive purposes
 It yield some revenue in future
 Examples: Construction of railway system, metros,
dams, Motorways in Pakistan, Irrigation projects
 Its revenue self finance its repayment
 Unproductive: if taken for purposes other than
production,
 Examples: floods, defence, femine, social services etc

2. Voluntary and Forced Debt
 Given voluntarily by public , Bodies
 Govt issues bonds against which it pays interest
 Government try to attract public for it through different
ways
 Forced debt which is taken forcibly. Usually in case of
severe emergencies and wars
 Usually, loans are volunteer

3. Internal and External Debt
 Govt use both internal and external sources of debt
 If the govt borrows from public, own commercial banks
and central bank , it will be internal debt
 If taken from outside sources, it will be external debt
 Pakistani governments borrow in form of national saving
schemes, bonds etc and banks withing country .
 The internal Debt is preferred as the interest remains
within boundaries of the state

4. Short Term (3-9 moths), Medium term (upto 5 years )
and Long term (5+ years)
5. Redeemable and Irredeemable Debt
 Redeemable Debt is The debt which the govt is bound
to pay after maturity period
 The govt makes plan in advance to pay. Most of the
debts are redeemable
 Irredemable debt is that one, whose interest is paid
regularly. The principal amount may be paid but no fixed
period for it.

6. Funded Vs Unfunded Debt
 Funded Debt is repaid after a long period of time and
govt set up separate head for it.
 Also called Floating Debt or long term debt
 Purpose: Building up industrial and economic
infrastructure, long term projects which may generate
revnue
 Unfunded Debt: no fund created for its repayment
 Govt repay it in routine expenditure
 Unfunded debt is a Short term loan


Causes of growing public debt
/ Why the countries Take Debt
 Abandonment of Laisseze – Fair Economy
 Unpopularity of taxes
 Natural calamities
 Defense and Wars
 Budget Deficit
 Fighting Depression
 Less flexibility to face economic crises
 Provision of infrastructure
 Economic Development

Trends in public debt in developing
countries
Pakistan
 Pakistan (http://www.finance.gov.pk/survey_1819.html)
 fiscal deficits and debt levels.
 shortfall in foreign exchange reserves
 devaluation of Pakistani Rupee
 Short fall of revenue
 Total public debt stood at Rs 28,607 billion at end March 2019,
recorded an increase of Rs 3,655 billion during first nine months of
current fiscal year.
 Balance of payment support
 build-up of foreign exchange reserves

Trends in public debt in developing countries

Other Countries
 Global debt has reached an all-time high of $184 trillion in nominal
terms, the equivalent of 225 percent of GDP in 2017.
 The most indebted economies in the world are also the richer ones
 the United States, China, and Japan—account for more than half of
global debt, exceeding their share of global output
 The private sector’s debt has tripled since 1950.
 Emerging market economies continued to borrow but at a slower
rate
 China debt declined 2017

PUBLIC DEBT
High Income Countries – Gross External Debt Stock 2010-2018

Taiwan
- 7th Largest Economy of Asia and 22nd in the world
- Transformed into Capital Developed economy
- About 8 % growth rate in recent decades
- Agri contributes 3% to GDP, against 35% in 1952,
- the service sector makes up 73% of the economy.
Percent of GDP 36
Nominal GDP 573 B USD

Brazil
 In Brazil, the fiscal situation worsened since 2008 due to
two reasons
 1st due to the tax exemptions granted by the federal
government reducing Public Revenue
 2ndly, public spending continued to grow fast: between
2008 and 2010,
Percent of GDP 153
Nominal GDP Billion USD 2055

Management of Public Debt
Indonesia
- One of largets economie sof south east asia
- Crises started in late 1990s
- - Political and Economic crises structed
Indonesian economy
Percent of GDP 69

Indonesia
0
10
20
30
40
50
60
70
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Public sector debt percentage of GDP

Iran
mismanagement, populist policies, corruption and
sanctions (US sanctions which came into effect in mid
2018) have led to a huge government debt to banks in Iran.
Oil and Gas major sector which dominated the economy.
$0 other industries playing their role in ISE
Percent of GDP 40

Saudi arabia
- Middle east economy
- Less of nationals to economic opportunities, subsidies,
free public goods, inconsistent economic policies,
conflicts, oil crises led the govt to borrow
 Prince Mohammed bin Salman
 continues to have strong popularity,
 providing a strong signal to investors
Percent of GDP 80

PUBLIC DEBT
India 521.1 Billion USD

 Growing public debt is a worldwide phenomenon
 It is a common feature of the fiscal policies of majority of
the economies
 Many economists does not consider public debt a major
problem but the problem is the mismanagement and
unsustainability of the public debt.
 The inadequate debt management and unlimited growth
of debt to GDP ratio results in, -crowding out of
investment, financial system instability, inflationary
pressures, exchange rate fluctuations etc.

 Persistent and high public debt needs a large piece of
budgetary resources for debt servicing.
 For example, in Pakistan debt servicing uses up more
than fifty percent of the total revenues
 Consequently, the government is forced to cut
allocations for other public service
 Public debt accumulates over time if deficit in the budget
persists for a long period of time.

 Does it matters whether govt opt for tax or borrow
for fiscal deficit?
 Barro-Ricardo proposition of equivalence (Barro,
1989) say no difference between these two. The govt
will raise taxation in future if public debt taken so
private saving increase rather than increase in
consumption.
 Public debt is not a big issue if it is manageable and
sustanable

 “ Debt management is the process by which the
government acquires and utilizes the debt efficiently and
effectively. Debt is manageable as long as the cost of
acquiring debt is reasonably low and the debt thus
obtained is used efficiently in such a way that it helps
growth in nation resources least in the long run. Debt is
used efficiently if the ratios of debt service to total
revenue and external debt service to exports fall or
remain constant”

 Public debt management is the process of establishing
and executing an effective policy for managing public
debt portfolio in order to raise required amount of
funding, achieve cost and risk objectives and to meet
other goals such as developing and maintaining an
efficient debt market.

 Prudent (Careful/wise) management of public debt can
help countries reduce their borrowing cost, mitigate
(lessen) the risks of refinancing, exchange rate
fluctuations and debt accumulation. The absence of such
prudence has forced myriad countries to give priority to
debt servicing instead of pursuing their social and
development goals.
(http://www.finance.gov.pk/survey_1819.html)

Objectives of Debt Management
 Fulfill the government borrowing needs.
 Raise the funds required by the government at the minimum long-
term cost,
 Maintain reasonable interest rate to support the monetary policy.
 Development of the domestic capital market
 Target foreign investors
 Encourage domestic savers
 Diversify borrowing and broadening the debt distribution.
 Promoting balanced maturity structure

Public Debt

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